TD Bank 2009 Annual Report Download - page 141

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 FINANCIAL RESULTS 137
GUARANTEES
Guarantees issued by the Bank include contracts that require payments
to be made to the guaranteed party based on: i) changes in the
underlying economic characteristics relating to an asset or liability of
the guaranteed party; ii) failure of another party to perform under an
obligating agreement; or iii) failure of another third party to pay its
indebtedness when due. Guarantees are initially measured and recorded
at their fair value with no subsequent remeasurement of fair value
unless they qualify as derivatives, in which case, they are remeasured
at fair value at each balance sheet date and reported as derivatives
in other assets or other liabilities as appropriate. The following types
of transactions represent the principal guarantees that the Bank has
entered into.
Assets Sold with Recourse
In connection with certain asset sales, the Bank typically makes repre-
sentations about the underlying assets in which the Bank may have
an obligation to repurchase the assets or indemnify the purchaser
against any loss. A repurchase obligation does not by itself preclude
sale treatment if the transferor does not maintain effective control
over the specific transferred assets. Generally, the term of these repur-
chase obligations do not exceed five years.
Credit Enhancements
The Bank guarantees payments to counterparties in the event that
third party credit enhancements supporting asset pools are insufficient.
Generally, the term of these credit facilities do not exceed 16 years.
Written Options
Written options are agreements under which the Bank grants the
buyer the future right, but not the obligation, to sell or buy at or by
a specified date, a specific amount of a financial instrument at a price
agreed when the option is arranged and which can be physically or
cash settled.
Written options can be used by the counterparty to hedge foreign
exchange, equity, credit, commodity and interest rate risks. The Bank
does not track, for accounting purposes, whether its clients enter into
these derivative contracts for trading or hedging purposes and has not
determined if the guaranteed party has the asset or liability related
to the underlying. Accordingly, the Bank cannot ascertain which
contracts are guarantees under the definition contained in the
accounting guideline for disclosure of guarantees. The Bank employs a
risk framework to define risk tolerances and establishes limits designed
to ensure that losses do not exceed acceptable, pre-defined limits. Due
to the nature of these contracts, the Bank cannot make a reasonable
estimate of the potential maximum amount payable to the counterpar-
ties. The total notional principal amount of the written options as at
October 31, 2009 is $123 billion (2008 – $109 billion).
Indemnification Agreements
In the normal course of operations, the Bank provides indemnification
agreements to various counterparties in transactions such as service
agreements, leasing transactions, and agreements relating to acquisi-
tions and dispositions. Under these agreements, the Bank is required
to compensate counterparties for costs incurred as a result of various
contingencies such as changes in laws and regulations and litigation
claims. The nature of certain indemnification agreements prevents the
Bank from making a reasonable estimate of the maximum potential
amount that the Bank would be required to pay such counterparties.
The Bank also indemnifies directors, officers and other persons, to
the extent permitted by law, against certain claims that may be made
against them as a result of their services to the Bank or, at the Bank’s
request, to another entity.
The table below summarizes as at October 31, the maximum poten-
tial amount of future payments that could be made under guarantees
without consideration of possible recoveries under recourse provisions
or from collateral held or pledged.
Maximum Potential Amount of Future Payments
(millions of Canadian dollars) 2009 2008
Financial and performance standby letters of credit $ 12,999 $ 11,627
Assets sold with recourse 870 507
Credit enhancements and other 312 254
Total $ 14,181 $ 12,388
Concentration of credit risk exists where a number of borrowers or
counterparties are engaged in similar activities, are located in the same
geographic area or have comparable economic characteristics. Their
ability to meet contractual obligations may be similarly affected by chang-
ing economic, political or other conditions. The Bank’s portfolio could
be sensitive to changing conditions in particular geographic regions.
CREDIT RISK
NOTE 33
(millions of Canadian dollars, except as noted) Loans and customers’ liability Derivative financial
under acceptances1Credit instruments2,3 instruments4,5
2009 2008 2009 2008 2009 2008
Canada 71% 73% 62% 64% 34% 24%
United States 23 25 32 27 21 23
United Kingdom 112112 14
Europe – other ––2426 34
Other international 112475
Debt securities classified as loans 4–––––
Total 100% 100% 100% 100% 100% 100%
$ 263,074 $ 230,664 $ 75,044 $ 80,735 $ 48,542 $ 81,885
1Of the total loans and customers’ liability under acceptances, the only industry
segment which equalled or exceeded 5% of the total concentration as at October
31, 2009 was: Real estate 10% (2008 – 11%).
2As at October 31, 2009, the Bank had commitments and contingent liability
contracts in the amount of $75,044 million (2008 – $80,735 million). Included are
commitments to extend credit totalling $61,379 million (2008 – $68,370 million),
of which the credit risk is dispersed as detailed in the table above.
3Of the commitments to extend credit, industry segments which equalled or
exceeded 5% of the total concentration were as follows as at October 31,
2009: Financial institutions 23% (2008 – 39%); real estate residential 9%
(2008 – 6%); oil and gas 10% (2008 – 8%); government and public sector 7%
(2008 – 2%); power and utilities 6% (2008 – 5%); automotive 5% (2008 – 3%);
and other 8% (2008 – 6%).
4As at October 31, 2009, the current replacement cost of derivative financial
instruments amounted to $48,542 million (2008 – $81,885 million). Based on the
location of the ultimate counterparty, the credit risk was allocated as detailed in
the table above.
5The largest concentration by counterparty type was with financial institutions
(including non banking financial institutions), which accounted for 83% of the
total (2008 – 92%). The second largest concentration was with governments,
which accounted for 9% of the total (2008 – 3%). No other industry segment
exceeded 5% of the total.